Lenders may require Rs 1L cr more due to changes in ecosystem, Raising funds difficult as scams have eroded investor faith

The government is likely to consider allocating more than Rs 2.11 lakh crore for bank recapitalisation programme. Two key recent developments — Rs 12,400 crore Punjab National Bank (PNB) fraud and higher provisioning requirements due to changes in IBC laws — have forced the Centre to rethink on the bank recap plans.

The government had last year announced Rs 2.11 lakh crore, two-year recapitalisation programme for state-run banks to help them deal with bad debts and revive credit growth. Of the total sum, Rs 1.35 lakh crore is to be raised through recapitalisation bonds, while the banks themselves were to raise another Rs 58,000 crore from share sales. The remaining Rs 76,000 crore is through budgetary allocation.

Banks now are likely to need around Rs 1 lakh crore more due to changes in the banking ecosystem, which have put pressure on their balance sheets and plans. The PNB fraud has made it difficult for lenders to raise funds from the capital market, official sources said. Any fraud at a public institution hits faith in that system. PNB scam is too large for the investor to buy into bank stocks, sources said.

The government plans to infuse about Rs 1.2 lakh crore in the next financial year starting April. Finance ministry sources said this figure will have to be assessed again in view of these developments. Although no estimate has been made on the additional capital as of now, the requirement would not be less than Rs 1 lakh crore given the new situations, they added.

Fund raising through stake sale has also been made difficult by the fact that 12 of the 21 state lenders are under prompt corrective action (PCA) of the Reserve Bank of India (RBI).

The government’s 2.11-lakh crore recapitalisation programme in this background is likely to fall short of the actual requirement by banks.

Another factor is the revised norms on debt resolution, which makes Insolvency and Bankruptcy Code (IBC) as the only tool for debt resolution.
The RBI has directed banks to set aside 50 per cent cover in the form of provisions for cases referred for insolvency proceedings at NCLT, putting pressure on their already fragile capital which is meagre due to hu­ge bad loans. The government will also have to see that the capital adequacy ratio (CAR) is maintained as a regulatory norm, which also needs capital.

The government has ea­r­marked nearly Rs 88,000 crore out of Rs 2.11-lakh crore of capital to 20 state-run banks to be pumped in by March 2018.

The government is also worried about the possibility of unearthing more sc­ams in the banks which would give rise not just to NPAs, but would also breach the public and international investors’ and rating agencies’ faith in the banking system of the country

There is also a strong possibility of more public sector lenders coming un­der the PCA.